Despite concerns about the future of Social Security, American workers are increasingly expecting to rely on Social Security retirement benefits from this government program. According to Gallup’s annual Economy and Personal Finance survey, 36 percent of non-retirees — about 10 percentage points higher than a decade ago — say they’re counting on Social Security to be a major source of their retirement income.
Currently, Social Security is the dominant source of income for more than half of married couples and 74 percent of single people aged 65 or older, according to the U.S. Social Security Administration. The average monthly payout for January 2015 is $1,328. The question, however, is whether there will be enough money for Generation X, millennials and future generations when they retire.
Will Social Security Run Out?
You shouldn’t rely solely on Social Security benefits in retirement, but the reason is not because these benefits are going to run dry. Despite popular belief, Social Security will not run out completely. Here’s why:
Social Security is funded through a 6.2 percent payroll tax that workers pay and another 6.2 percent employers kick in — self-employed people have to pay the full 12.4 percent. It’s also financed through a trust fund, which built up reserves when more money was coming into the system through taxes than was being paid out.
Now that more money is being paid out in benefits than is coming in through payroll taxes, that trust fund will be depleted by 2034 if Congress doesn’t take action to address the problem, according to the last five Trustees Reports. But that doesn’t mean the program will run out of money entirely. Payroll taxes will cover about 75 percent of scheduled benefits.
Certainly, sending out reduced benefit checks won’t make people happy. And legislators know this. “Congress knows how popular Social Security is and know that old people who care about it vote, so they will do something,” said Mary Beth Franklin, a Social Security expert and contributing editor at InvestmentNews.
Congress will have to make some changes — perhaps a slight increase in the full retirement age or the earnings cap. Currently, only earnings up to $118,500 are hit by the payroll tax, Franklin said. But anyone 55 or older probably won’t be affected by the changes. Regardless what Congress does, said Franklin, there won’t be any surprises.
How to Make Your Social Security Retirement Benefits Last
As some see it, the Social Security system’s funding issues aren’t the biggest problem. “Perhaps the greatest Social Security deficit in this country is the lack of education around the retirement benefits of the program,” said Michael R. Fanning, executive vice president of MassMutual’s U.S. Insurance Group, in a press release. A recent survey by MassMutual found that only 28 percent of respondents received a passing grade when asked basic questions about Social Security retirement benefits.
Social Security benefits are a guaranteed source of retirement income if you’ve worked for at least 10 years and paid into the system. And your benefit — the amount you get each month — is based on your income in your 35 highest-earning years.
There are other things, though, that can affect how much you get. Unfortunately, people don’t always get all the money they’re entitled to because of mistakes they make when collecting Social Security benefits, said Phil Michalowski, a vice president with MassMutual. Here are three things you should do when you apply for Social Security and to make sure your benefits last:
1. Wait until full retirement age to collect Social Security benefits.
You can claim Social Security retirement benefits as early as age 62, but the amount you receive will be permanently reduced. Michalowski said about 72 percent of people receive reduced benefits because they file for Social Security as soon as they are eligible.
To avoid a cut of 25 to 30 percent of your benefits, wait to file for Social Security until full retirement age, which is 66 for those born between 1943 and 1954 and 67 for those born in 1960 or later. The maximum monthly benefit in 2015 for someone at full retirement age is $2,633. At age 62, the maximum monthly benefit is $2,025.
Plus, if you start receiving benefits at 62 and continue to work you’ll lose $1 in benefit payments for every $2 earned above the annual limit of $15,720. The year in which you reach full retirement age, you’ll lose $1 in benefits for every $3 earned above $41,880 until you actually reach full retirement age — at which point the limit disappears.
Filing early also prevents you from taking advantage of some other creative claiming strategies that can significantly boost your benefit, said Franklin.
2. Wait until you turn 70 if you can.
If you’re in good health, have a family history of longevity and aren’t pinched for cash in retirement, you can boost your Social Security benefit significantly by waiting until age 70 to file for benefits. Your payout increases 8 percent each year you delay receiving benefits after reaching full retirement age until age 70. Cost of living adjustments will be included, too.
There’s no other investment right now that gives you a guaranteed 8 percent rate of return, Franklin said. In 2015, the maximum monthly payout someone can receive at 70 is $3,501 — nearly $1,000 more than the full-age retirement monthly benefit.
3. Take advantage of spousal Social Security benefits.
A married beneficiary can receive up to 50 percent of the working spouse’s Social Security at full retirement age, but that benefit is reduced if the spouse claiming the benefit is below full retirement age. Even if you get divorced, you still can claim a spousal benefit as long as you were married at least 10 years and haven’t remarried.
To take full advantage of the spousal benefit, Franklin recommends a strategy known as “file and suspend.” At full retirement age, the working spouse can file for benefits to trigger the 50 percent spousal benefit for the non-working spouse then suspend his or her own benefits until age 70 to take advantage of a bigger payout. The spousal benefit payout won’t get a boost, but the survivor benefit will. That benefit is worth 100 percent of what the spouse was receiving at the time of death. So, that 32 percent bigger payout from delaying benefits until age 70 could make a huge difference in income for the surviving spouse.
Dual-income couples can also benefit from a creative claiming strategy. If you work and are entitled to both your own benefit and a spousal benefit, Social Security will pay you the higher of the two, Franklin said.
Say both you and your spouse are entitled to a $2,000 monthly benefit at full retirement age: One can file for benefits to trigger the spousal benefit then suspend benefits until age 70. The other spouse files and restricts her claim to spousal benefits to get a $1,000 monthly spousal payout while she continues to work and earn credit on her own delayed benefit. At 70, both claim their own monthly benefit that would be $2,640 each — 32 percent more than $2,000 — giving them more than $63,000 a year in Social Security income, said Franklin, who writes about these strategies in her book “Maximizing Your Clients’ Social Security Retirement Benefits.”
MassMutual has a free downloadable guide, “Welcome to the Social Side of Retirement,” that explains these strategies and their benefits in more detail.
How to Supplement Social Security Retirement Benefits
Even if you take steps to maximize your Social Security benefit, it’s important to realize this source of retirement income should be only one component of a bigger plan, Michalowski said. It’s important to figure out how much of your expenses in retirement Social Security will cover and how much more you will need from other sources, he added.
Start by using Social Security’s Retirement Estimator calculator to get an idea of what your monthly payout will be. Then consider what sort of lifestyle you want in retirement and what your expenses — mortgage, car, food, health care — will be.
If you see that Social Security and retirement income you expect to receive from a pension, annuity or retirement account won’t be enough, you can try adjusting your retirement savings strategy. Seek out retirement planning tips and other ways to boost your savings so you can fully enjoy life when you exit the workforce.
This article was updated with new information on Aug. 13, 2015.